Scotiabank's Commodity Price Index Posts Mild Decline in April

TORONTO, May 13, 2013 /CNW/ - The decline in Scotiabank's Commodity Price Index in April was quite mild - down 0.2% month-over-month (m/m) - despite a sharp mid-month selloff in gold and talk of an end to the 'Super-Cycle' in commodity prices.

"Financial market concern over the outlook for commodity markets was overblown mid-month," said Patricia Mohr, Scotiabank's Vice President of Economics and Commodity Market Specialist. "While China's Gross Domestic Product (GDP) slowed to 7.7% year-over-year (y/y) in 2013:Q1, from 7.9% in 2012:Q4, actual demand for raw materials was robust in China. The double-digit growth of China's passenger car market, up 20% in Q1, reinforces its importance as a driver of growth in worldwide auto demand and related commodities such as copper."

For more details about the Scotiabank Commodity Price Index, please read the full report below. Highlights include world potash shipments begin to pick up, after order deferrals last year; a rebound in U.S. oil prices in May, lifted by optimism for a stronger pace of U.S. economic growth as 2013 unfolds; comments on new initiatives for natural gas, liquefied natural gas (LNG) as a transportation fuel in trucking and for railway locomotives; and U.S. Department of Agriculture expectations for record-large corn and soybean crops in 2013-14.

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Scotiabank's Commodity Price Index Posts Mild Decline in April  

  • Potash — world shipments begin to pick up, after order deferrals last year. 
  • Physical demand for copper remains robust in China, with prices rallying back in May.
  • Natural Gas — new initiatives for LNG as a transportation fuel.

Despite a sharp mid-month selloff in gold and talk of an end to the 'Super-Cycle' in commodity prices, the decline in Scotiabank's Commodity Price Index in April was quite mild — down 0.2% month over month (m/m). The All Items Index remained above late-2012 levels and is down a mere 0.1% year over year (yr/yr). Financial market concern over the outlook for commodity markets was overblown mid-month. While China's Gross Domestic Product (GDP) slowed to 7.7% yr/yr in 2013:Q1, from 7.9% in 2012:Q4, actual demand for raw materials was robust in China.

Stronger Oil and Gas prices in April (+2.6% m/m) partially offset declines in the Metal and Mineral sub-Index (-2.5% m/m), the Forest Products sub-Index (-1.2% m/m) and the agricultural component (-1.6% m/m). Both light and heavy crude oil prices rose in Alberta, as did Canadian natural gas export prices. The discount on Western Canadian Select (WCS) heavy oil off West Texas Intermediate (WTI) narrowed from US$26.23 per barrel to US$23.07, pushing up WCS heavy oil from US$66.73 to US$69. Further gains are likely in May with the discount on WCS easing further to US$13.90 and WTI oil rallying as high as US$96 on May 8, after falling to a low of US$86.68 on April 17th. Anticipation of some pick-up in the U.S. economy as 2013 unfolds — recently lifting U.S. equity markets (the Dow Jones Industrial Average and the Standard and Poor's 500) to new all-time record highs — has contributed to somewhat stronger oil prices, particularly in the U.S.

Despite rising discounts on Alberta crude — linked partly to inadequate export pipeline capability to tidewater to access the faster-growing markets of Asia-Pacific (either via the B.C. Coast or Eastern Canada) — Alberta's crude oil output continued to rise in 2012. In its annual survey, the Energy Resources Conservation Board reports that Alberta oil production climbed to almost 2.5 million barrels per day (mb/d) — up 244,000 barrels per day (b/d), with a 65,000 b/d gain in conventional light and heavy oil output and a 178,000 b/d gain in the oil sands. The rejuvenation of legacy oil pools in Alberta — such as the Pembina-Cardium — through horizontal, multi-fracturing drilling technology helped to boost conventional light oil output, after recent declines (please see table). The Energy Resources Conservation Board (ERCB) expects Alberta's oil output to increase another 273,000 b/d in 2013 (with start-up of Imperial Oil's Kearl Lake and Cenovus' Christina Lake Phase E). Production should rise by a total of 573,000 b/d from 2012-15 (Cenovus, Canadian Natural Resources, Conoco/Phillips, Devon, Dover, Harvest Energy, Husky and Nexen). To counter inadequate pipeline infrastructure, producers are using innovative transportation solutions to deliver their product to higher-value markets where world prices prevail (e.g. rail to the U.S. Gulf Coast).  

In contrast, the Metal and Mineral Index lost significant ground in April (-2.5% m/m). Gold prices posted a sharp selloff in mid-April from US$1,561.50 per tonne on April 11 to an intraday low of US$1,321 on April 16 — and base metal prices moved lower, in reaction to a moderately slower pace of Gross Domestic Price (GDP) growth in China in the first quarter. However physical demand for gold strengthened noticeably in Asia and the U.S. at lower prices, with gold rallying back to the US$1,425 level in mid-May (limited in recent days by a stronger U.S. dollar).  

The decline in London Metal Exchange (LME) copper prices from US$3.48 per pound in March to a low of US$3.09 on April 23 was overdone. Despite financial market jitters over prospects for China — with the authorities in Beijing now comfortable with a somewhat slower GDP growth target of 7.5% — China's physical demand for copper remains robust. Copper prices have rallied back to US$3.35, yielding a profit margin of 37% over average world breakeven costs including depreciation.  Industrial production in China reaccelerated to 9.3% yr/yr in AprilCopper semis production (wire and cable, tube and sheet) jumped by 18% yr/yr in the first quarter, with strong underlying demand for air conditioners, household appliances and cars. The double-digit growth of China's passenger car market (up 20% in Q1) reinforces its importance as a driver of growth in worldwide auto demand and related commodities such as copper.

While China's copper imports fell in April due to the port strike in Chile and the closure of a smelter in India, we expect China's imports of refined copper to increase over the next several months due to a severe shortage of scrap in China and lower domestic refined output. Inventories in bonded warehouses in Shanghai have already dropped from a peak of just under 800,000 tonnes in February to 660,000 tonnes at the end of April and will decline further.

The Forest Products Index lost ground in April (-1.2% m/m), but remained 15.3% above a year ago (the strongest performance of any sub-component over the past year). Both lumber and Oriented strand board (OSB) prices retreated in mid-April alongside an inventory build — during the seasonally slow first quarter — though we expect prices to rally back in the third quarter. Western Spruce-Pine-Fir 2x4 lumber prices have fallen to US$338 per thousand feet board measure (mfbm) in mid-May (now oversold) — down from US$402.80 in March.  OSB prices in the U.S. North Central region are currently US$337 per thousand sq. ft., down from US$430 in March.

Lower building material prices in April were partly offset by a US$50 jump in U.S. linerboard prices to US$740 per short ton and a US$30 increase in northern bleached softwood kraft (NBSK) pulp prices to US$930 (also in the U.S. market). Low U.S. inventories and expectations for a revival in packaging demand later this year allowed producers to quickly implement the linerboard price increase (the first since September 2012). The top five producers in the U.S. represent 75% of capacity and have considerable pricing power. Norampac and Rocktenn — the two big players in Canada — have also announced an increase in Canada.  Good news for Ontario — a large, new linerboard mill in Niagara Falls will start up this year (549,000 tons), while the newsprint mill in Whitby will be converted to linerboard (300,000 tons). Current linerboard prices are lucrative, yielding margins over average cash costs of 32% in Quebec and 48% in the southern U.S.

Finally, the Agricultural Index slipped by 1.6% m/m in April, as small declines in wheat, Atlantic Coast lobster, hogs and cattle more than offset firmer canola and barley prices. In its first supply and demand assessment for the 2013-14 crop year (beginning this September), the U.S. Department of Agriculture projects record-large U.S. and global coarse grain and oilseed crops, ending a three-year period of very tight supplies. For corn, the ratio of U.S. ending stocks-to-use is projected to increase from a very low 6.9% in the current crop year to 15.5% in 2013-14. Chicago Board of Trade (CBOT) futures for corn dropped by about 2% and soybean futures edged down, after release of the report on Friday (May 10), though losses were limited by delayed plantings this spring due to cold, snowy weather in the U.S. Midwest. While an influential report, we caution readers that the U.S. Department of Agriculture (USDA) bases its initial projections on the March 28th planting intentions report, "more normal weather going forward" after last year's drought and higher yields.  These optimistic assumptions are subject to substantial change over the growing season. Though negative for corn, soybean and canola prices, the report is a positive for prospective fertilizer application (including potash). Corn is one of three crops using the most potash per hectare planted. 

Natural Gas — Market Development Initiatives in Transportation
Nymex natural gas prices climbed from US$3.77 per one million British thermal units (mmbtu) in March to US$4.16 in April — the highest since July 2011 — with Canadian export prices following suit. Prolonged wintry weather in the U.S. has boosted heating demand and cut gas-in-storage in the normally seasonally weak second-quarter.

Of greater importance to the natural gas industry over the medium term are the following three developments:   1) the intense interest by Japan in securing more liquefied natural gas (LNG) supplies to fuel its economy — a reaction to the Fukushima-Daiichi nuclear power event; China and South Korea are also quite interested in LNG, including potential imports from British Columbia;   2) Market development initiatives holding promise for natural gas as a new transportation fuel, taking advantage of historically low natural gas prices from shale and its lower sulphur oxide and CO2 emissions than petroleum products. Shell is planning three 250,000 tonnes per year LNG liquefaction plants in Calgary, Sarnia and Geismar, Louisiana — to fuel 5,000 trucks per day. Robert Transport (a leading trucking company) will be operating 180 LNG-fuelled tractor trailers by 2014. The Canadian National Railway is testing an LNG-fuelled locomotive and BNSF and UP will test LNG locomotives this year;  and 3) the many LNG-export proposals for the U.S. Gulf and northern coast of B.C., promising to tighten North American supply and demand conditions for natural gas later in the decade, if approved by government.  

Potash Shipments Recover

Spot prices for potash, Free on Board (FOB) Vancouver, were largely flat in April at US$405 per tonne for overseas markets. Prices averaged US$452.50 last December. While buyers are resisting announced price increases in Brazil and Malaysia, we believe prices are now at bottom. On a more positive note for Western Canada's potash producers, shipments surged in the first quarter of 2013.  Potash Corp doubled its North American sales volumes in the first quarter.  The sales improvement partly reflects the resumption of purchases by China, following a lower price agreed with Canpotex in late December.  Overseas buyers, who had deferred orders last year awaiting lower prices, have also stepped-up purchases.  Global potash shipments (from Canada, Russia, Belarus and others) should climb to 57.5 million tonnes in 2013, after dipping to 51.9 million last year.

Brazil and China are likely to remain the growth markets for potashBrazil (an agricultural power house) will likely harvest record corn and soybean crops in 2012-13 and 2013-14, though the country faces significant port constraints.  Exporters are trucking soybeans an extra 1,000 miles to Rio Grande in the south to avoid congestion at the two main grain ports of Santos and Paranagua.  India should step up its imports this year, after negotiating a lower price with Canpotex and BPC in February (-US$63).  However, volume gains will be limited by another cut in the government's potash subsidy (-21.5%), likely causing a slight increase in retail prices to Indian farmers.  The subsidy for di-ammonium phosphate (DAP) has also been reduced by 14% to rein in India's fiscal deficit, though a huge 45% increase in food subsidies for India's poor has also been proposed. 

Spot iron ore prices, 62% Fe, delivered to northern China edged down to US$137.40 per tonne in April from US$139.87 in March and US$147.65 a year ago (representative of spot prices paid for Labrador Trough ore).  China's crude steel production was strong in 2013:Q1 (+10% yr/yr), with daily output staying near record highs of 2 million tonne (mt) since mid-February, and the third-highest iron ore imports on record in April.  While the normal seasonal pick-up in construction demand this spring may be muted by property market curbs, Rio Tinto is proceeding with its plan to boost output by 70 mt to 360 mt by 2015, expecting China's steel production to continue to grow, albeit at a slower 3% per annum.

SOURCE: Scotiabank - Economic Reports

For further information:

Patricia Mohr, Scotiabank Economics, (416) 866-4210,; or
Devinder Lamsar, Scotiabank Media Communications, (416) 933-1171,

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